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Financial implications of contracting for acquisition programs.

Professor J. Gerald Land, Professor of Financial Management Defense Acquisition University

Department of Defense (DoD) acquisition program offices must adhere to adhere to
verb 1. follow, keep, maintain, respect, observe, be true, fulfil, obey, heed, keep to, abide by, be loyal, mind, be constant, be faithful

 the Federal Acquisition Regulations The Federal Acquisition Regulation (usually referred to as the FAR or F.A.R.), are a series of regulations issued by the Federal government of the United States that concern the requirements of contractors for selling to the government, the terms under which the  (FAR) and DoD Federal Acquisition Regulation Supplement (DFARS DFARS Defense Federal Acquisition Regulation Supplement
DFARS DoD Federal Acquisition Regulation Supplement
) for contracting issues. Contracting requires a comprehensive knowledge of policy and regulations. For example, FAR Contract Clause 52.232-8, "Discounts for Prompt Payment," is required to be included in all fixed-price supply and service contracts; under DFARS 204.7302, a contractor shall be registered in the DoD Central Contractor Registration The Central Contractor Registration (CCR) is the primary supplier database for the U.S. Federal government. The CCR collects data from suppliers, validates and stores this data, and disseminates it to various government acquisition agencies.  database prior to award of a contract.

Contracting officers A US military officer or civilian employee who has a valid appointment as a contracting officer under the provisions of the Federal Acquisition Regulation. The individual has the authority to enter into and administer contracts and determinations as well as findings about such contracts.  (COs) have broad discretion to determine the best contract type for a requirement. They have the authority to bind the government legally to a contract. COs approve terms, conditions, clauses, and the fair and reasonable price.

Determining a Fair and Reasonable Price

What is a fair and reasonable price in contracting? The fair and reasonable price represents a compromise between the viewpoints of the seller (contractor) and the buyer (government). The contractor may consider one price reasonable and the government, another price. The term fair and reasonable implies a subjective view. As a result, the government must consider all circumstances, including competition and market price of similar goods or services.

A proposed price is justified as fair and reasonable by a detailed evaluation using acceptable procurement methods. Some methods include applying the Producer Price Index and learning curve to a previous price, reviewing catalog lists, analyzing quotes between approved sources, and verifying certified costs and pricing data.

Evaluations of reasonable price may include price analyses or cost analyses. Price analysis is quick and economical to perform. This analysis is used on competitive proposals, sealed bids, and small purchases, as well as purchases estimated to cost up to $500,000, repeat buys of other items, and commercial off-the-shelf Commercial off-the-shelf (COTS) is a term for software or hardware, generally technology or computer products, that are ready-made and available for sale, lease, or license to the general public.  items.

Compared to price analysis, cost analysis is more time-consuming and expensive to perform. Research and development efforts, unique sole-source items, and high-dollar procurements (that is, acquisitions over $500,000) are evaluated using cost data.

Types of Contracts

There are two basic types of contracts: fixed price and cost reimbursement Reimbursement

Payment made to someone for out-of-pocket expenses has incurred.
. Fixed-price contracts pay a contractor on delivery for a specific product or service performed. Commercial items can be acquired on a fixed-price contract. These items are typically inspected and accepted at destination. When shipping the items free on board (FOB FOB 1) adj. short for Free on Board, meaning shipped to a specific place without cost. 2) Friend of Bill (Clinton). (See: Free on Board) ) destination (that is, where the title for goods transfers at destination), the contractor is responsible for shipping costs. This type of contract (with inspection, acceptance, and FOB at destination) usually is locally administered.

With a cost-reimbursement contract, a contractor receives periodic payments for his best effort. These contracts may include an award, fixed, or incentive fee. Cost-reimbursement contracts, which are more complex, are administered by the Defense Contract Management Agency.

Occasionally, contracts must be terminated for convenience or default. The liability costs for the termination must be borne by the program obtaining the goods or services, as terminations cannot increase available funding. Unliquidated Unassessed or settled; not ascertained in amount.

An unliquidated debt, for example, is one for which the precise amount owed cannot be determined from the terms of the contractual agreement or another standard.

 obligations must be sufficient to cover the costs for termination of convenience. When a contractor defaults on a contract, the remaining funds cited on that contract may be cited on a replacement contract.

Contracting is a partnership between the government and the contractor to meet the needs of the mission. In addition to the acquisition program offices, managing ongoing contracts involves the services of other organizations. The Defense Finance and Accounting Service The Defense Finance and Accounting Service (DFAS), an agency of the United States Department of Defense, provides finance and accounting services for the military and other members of defense.

In FY 2004, DFAS:
  • Processed 104M pay transactions to 5.
 processes invoices, the Defense Contract Management Agency administers contracts, and the Defense Contract Audit Agency The Defense Contract Audit Agency (DCAA), under the authority, direction, and control of the United States Under Secretary of Defense (Comptroller), is responsible for performing all contract audits for the United States Department of Defense (DoD), and providing accounting and  provides contract audit service. If required, contractors provide fiscal status reports on contracts.


(1.) Department of Defense Financial Management Regulation, Volume 10

(2.) Enhanced Defense Financial Management Course Manual

(3.) Financial Implications of Contracting for Acquisition Programs Slides by Mr. Gerald Land, Defense Acquisition University

Reported by Connie R. Hollins

Connie R. Hollins is a former DoD contract specialist now working in the Accounting Directorate of the DFAS DFAS Defense Finance & Accounting Service (US DoD)
DFAS Decorative and Fine Arts Society (The Hague, Holland)
DFAS Dark Field Alignment System
DFAS Department of Fisheries and Aquatic Sciences
 Dayton. A member of ASMC's Aviation Chapter; she is the first DFAS Dayton employee to become a Certified Defense Financial Manager.
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Title Annotation:Workshop Report
Author:Hollins, Connie R.
Publication:Armed Forces Comptroller
Date:Jun 22, 2005
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